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Hungary is narrowing the economic gap with peers

Thursday, May 4, 2017

The Hungarian economy is set to expand at an annual rate exceeding 4 percent of GDP, which also means that the rate of domestic GDP growth will be above that of the EU’s average – Hungary’s Convergence Programme for 2017-2021 states. The document outlining key macro-economic trends predicted in the next four years has been sent to the European Commission by the Government on Tuesday. Similarly to the routine of previous years, the elaboration of the Programme was conducted concurrently to the drafting of the budget bill.

In 2017, Hungary’s economic policy has reached a major milestone. Although prudent fiscal management and the gradual reduction of the government debt-to-GDP ratio are set to continue, parallel to the mobilization of diminishing labour market reserves the Government’s pro-growth instruments are more and more targeted at optimizing economic resources and improving productivity and competitiveness.

Besides improving the productivity of Hungarian labour force, it is equally important that unavoidable wage hikes remain proportionate to productivity gains. Concurrently, another priority is to shift the weight of GDP growth components towards innovation-led economic activities producing higher added value.

Thanks to the Government’s pro-growth economic policy, nowadays Hungary’s economic expansion has been sustainable, and the growth structure has been balanced, as the majority of sectors within the national economy were contributors to positive growth, and the expansion has not been driven by the unjustified taking of loans. External and internal balance indicators continue to be favourable. Hungary has been one of the few EU member states which have managed to steadily reduce government debt since 2011. Prudent fiscal policy has caused the deficit of the general government budget to fall to 1.8 percent and the general government debt-to-GDP ratio to be reduced to 74.1 percent. These factors have in turn helped reduce the country’s external exposure. The five-year CDS premium, a key indicator of country default risks, has slumped from 300 basis points in 2013 to below 120 basis points by April 2017. One after the other, credit rating agencies upgraded Hungary’s credit risk, and in 2016 all the three major credit rating agencies have restored the country’s investment-grade status.

The positive U-turn in labour market trends has caused the number of people in employment to rise, from 3.7 million in 2010 to some 4.4 million recently. Following a downward trend in place for 56 months in a row, the unemployment rate fell to 4.5 percent in the first quarter of 2017.

One of the most significant economic policy agreements designed to bolster existing, positive labour market trends, fortify the Hungarian economy’s capacity to maintain jobs and retain labour as well as to boost competitiveness was the wage deal concluded with major employee and employer organizations in November 2016.

The six-year wage agreement supports wage growth and places the entire Hungarian economy on a faster growth path. Concurrently to the wage increase, the Government has launched a large-scale housing programme, aiming to realize social policy objectives as well as to facilitate economic expansion. Besides these measures, the reduction of VAT on basic foods, restaurant services and Internet services will also expedite disposable income growth, leading to further increase in household consumption.

The new corporate income tax rate of 9 percent is expected to underpin business investment. The accelerated disbursement of EU funds in the new programming period is another measure for improving business climate in Hungary.

Following the period of successful crisis-management, the Hungarian economy has regained its macro-economic balance and subsequent pro-growth measures have enabled the economy to enter a stable growth path: the general government budget deficit has fallen to below 3 percent of GDP, the number of people in employment has hit a record high and the financial burdens of households have decreased. In coming years, one of the main priorities of the Government’s economic policy is to improve the country’s competitiveness through efficient measures, which is expected to further reduce the general government debt ratio parallel to adding momentum to economic growth.

(Ministry for National Economy)

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